Autumn Forecast

Economic growth is expected to slow this year (to 1.5%) and thus be lower than expected in IMAD’s Spring Forecast (2.4%). Overall export growth is expected to be lower than projected in the Spring Forecast due to weaker growth in foreign demand and a decline in services exports. At the same time, it is expected to be lower than growth in foreign demand also this year due to pressures from rising unit labour costs. Contrary to expectations in the spring, investment growth is now expected to stagnate rather than increase this year. Government investment, one of the highest in the EU as a share of GDP, will be slightly higher this year than last and is expected to increase in the second half of the year, while private construction investment is expected to stagnate. With activity in the export sector expected to grow, moderate growth in investment in machinery and equipment is anticipated this year. Private consumption, which stagnated last year, will pick up this year, supported by high employment, continued real growth of wages and real disposable income, lower inflation and increased consumer optimism. Growth in private and government consumption will be methodologically influenced this year by the abolition of supplementary health insurance and the introduction of a compulsory health contribution. This change results in relatively lower growth in private consumption and higher growth in government consumption, while the overall effect on GDP is neutral. Government consumption growth will be somewhat higher this year than expected in the spring, driven by post-flood reconstruction, which led to a relatively stronger increase in government expenditure on goods and services than on investment in the first half of the year. Amid strong growth in domestic consumption, including inventories, import growth is expected to significantly outpace export growth. In 2025, GDP growth is expected to return to higher levels (2.4%). With slightly higher growth in foreign demand, growth in exports and value added in manufacturing is expected to improve. Trade in services is also expected to increase. Investments in manufacturing and construction are expected to pick up, with growth in construction activity supported by, among others, strong government investment activity, including flood defence construction, flood recovery efforts, and investments under the Recovery and Resilience Plan. With higher real income growth, private consumption growth is also expected to accelerate. Employment is at a record high, while unemployment is at a historic low. Severe labour shortages will dampen employment growth over the next two years, while nominal growth in the overall average gross wage will strengthen further next year with the expected implementation of the public sector wage system reform. Inflation has fallen significantly this year and will be much lower on average (2.1%) than expected in the spring (2.7%). Inflation is expected to remain low until November this year before rising towards the end of the year and the beginning of next year (due to the low base effect and the expiry of measures to curb high energy prices), and will approach 2% again in 2026. The realisation of the Autumn forecast is subject to a number of uncertainties related to the geopolitical and international economic situation. Domestic risks are related to the impact of deteriorating competitiveness on the export-oriented sector of the economy, and especially the country’s capacities to implement high levels of investment in the coming years, and the lack of clarity regarding certain reform measures.